Economic Data Watch and Market Outlook
Global equity markets took a breather last week, as a spate of negative news was led by rising US/China tensions, the increase in COVID-19 cases, spike in Jobless Claims and a pullback in the market leading technology sector. The week began on a positive note on expectations of further stimulus from the European Commission and the US Congress. The upside momentum was dashed on Thursday, as weekly Jobless Claims in the US rose for the first time since mid-March, Intel reported the release of its new ultra-fast 7 nanometer chip would be delayed and Microsoft reported a slowing in revenue growth from its cloud computing company Azure. Exacerbating the downside pressure was the US State Department ordering the closure of China’s Houston consulate, which it accused of spying and in order to “protect American intellectual property”. China in retaliation ordered the shutting of the US consulate in Chengdu. On the COVID-19 front, the number of daily cases has risen to a rolling seven-day average of 67,000, bringing US total cases to over 4 million.
As we enter next week’s trading sessions, market direction will be dictated by the push and pull between a full slate of economic data and earnings releases, progress on COVID-19 treatments, and expectations for further fiscal stimulus. The US Congress is expecting to put forth another stimulus bill before the August 8th recess, providing a financial package somewhere between the $1 trillion and $3 trillion proposed by Republicans and Democrats respectively. A primary issue at stake is the expiration of the $600 per week enhanced unemployment benefit which expires at the end of July. From an earnings perspective, a number of high-profile market titans will be reporting led by Apple, Amazon, Google parent Alphabet and Facebook. The markets seem to be consolidating after a massive run since mid-March (S&P 500 up 44.6%), but volatility will remain heightened as geo-political issues, corporate earnings, COVID-19 and monetary/fiscal stimulus will impact asset prices.
In turning to next week’s economic calendar, a busy week will include the July FOMC meeting and a glimpse of how the COVID-19 shutdown affected US activity with the first release of Q2 GDP data. On Monday we begin with the US Durable Goods report for June, where the expectation is for a 6.9% jump which continues the recovery seen in May and June.
The Conference Board consumer confidence index out on Tuesday, is projected to drop in July by 4.1 points to 94.0 The decline in consumer sentiment in recent reports has been due to the rising COVID-19 case counts.
On Wednesday, the solid housing market should continue its positive trend as the June Pending Home Sales Index is estimated to have jumped another 12.0%. The June increase follows the surge of 44.3% in May.
The report for Q2 GDP out on Thursday is expected to show the greatest decline since the Great Depression. The massive growth decline caused by the COVID-19 economic shutdown, is expected to show a -32.5% plunge. The GDP decline will show a drop in its main growth components, consumer spending, business and residential investment and government spending.
Consumer spending on Friday is projected to increase by 4.8% in June, while nominal spending rose by 5.2%. Also, on Friday the employment cost index (ECI) is estimated to rise by 0.5% during Q2 and 2.7% annualized. ECI is expected to see downward pressure in the coming months due a weak labor market caused by COVID-19.
The Week In Review
U.S. Equities
US equity markets halted a three-week uptrend, due to rising tensions between the US and China which caused consulates to be closed and disappointing corporate news from Microsoft and Intel.
- Dow Jones -0.74% , MTD +2.66% , YTD -6.00 S&P 500 -0.27%, MTD +3.82%, YTD +0.62%
- Russell 2000 -0.38%, MTD +1.86%, YTD -11.32%
Drivers: I) The US State Department and the Trump administration on Tuesday ordered the closure of China’s Houston consulate. It has been alleged that Chinese agents having been attempting to steal medical research data from medical facilities in Texas, including the Texas A&M medical system. China in retaliation on Friday, ordered the US to close its consulate in Chengdu. The US has an embassy in Beijing and five other consulates.
II) Existing homes sales for June soared by 21.0% to 4.72 million units on a seasonally adjusted annual rate (saar). The sizable jumped reversed the dramatic decline seen in previous months, as housing activity came to a virtually halt due to the spread of COVID-19. The tailwind behind housing has been the drop in mortgage rates to record lows. The 30-year mortgage hit an all-time low of 2.98%, while the 15-year rate has fallen to 2.54%.
III) The Markit’s PMIs showed gains, with the manufacturing PMI rising from 49.8 in June to 51.3 in July while the services PMI increased from 47.9 to 49.6. There has been improvement seen across several of the business surveys in recent months following a period of substantial weakness. The recovery has been bumpy as employment has lagged, while incoming new business and new export orders have seen a sharp rebound.
IV) New single-family sales in June jumped by 13.8% to 776,000 units saar. The strong resurgence of growth in May and June, brought the monthly sales rate up to new highs not seen since the Great Recession. The June increase came in just above the previous high seen in January of 774,000 units. The strong increase seen over the past two months, still has sales in 2020 on average during Q2 down -13.2% saar.
V) Equities Month to Date are higher with Mid-Cap, Growth, Materials, and Consumer Discretionary leading equity price performance. The laggards for the period are Small-Cap, Value, Energy and REITs.
Capitalization: Large Caps +3.95% (YTD +1.03%), Mid-Caps +4.21% (YTD -5.30%) and Small Caps +1.86% (YTD -11.36%). Style: Value +3.06% (YTD -19.64%) and Growth +3.68% (YTD -3.65%). Sector Groups: Technology +0.58% (YTD +15.56%), Information Technology +0.66% (YTD +14.48%), Consumer Discretionary +6.04% (YTD +8.82%), Communication Services +4.74% (YTD +4.15%), Healthcare +4.96% (YTD +4.10%), Materials +9.06% (YTD +1.28%), Consumer Staples +5.83%, (YTD -0.04%), Utilities +6.77% (YTD -5.04%), REITs -0.13% (YTD -8.66%), Industrials +4.49% (YTD -10.78%), Financials +4.65% (YTD -19.99%) and Energy -0.94 (YTD -35.29%).
European Equities
The MSCI Europe Index was slightly higher last week, as the positive tone from the EC’s approval of a €750 billion was offset by the rise of global COVID-19 cases which could stall the economic recovery.
Drivers: I) The EU reached an agreement on a budget for 2021 to 2027 and a recovery fund after nearly four days of negotiations. The unprecedented rescue package secured the approval of the three “parsimonious” countries, Netherland, Austria, and Denmark. The key was a shift in the composite of the €75oB deal, from €500B in grants and €250B in loans to a €390B/€360B split. Another important concession includes the right of an EU member to raise an objection to the EC should it believe the plan is not meeting “milestones and targets”.
II) The Euro-zone composite PMI rose by 6.3 points to 54.8 in July, which is the third consecutive monthly rise since reaching its April nadir of 13.6. The data series has now rebounded above its pre-COVID-19 level of 51.4 seen in January to February. The positive report shows that economic activity is expanding at a quickening pace in Q3, and is implying GDP growth could rise by 60.0% in the third quarter on an annualized basis.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +0.18% for the week (MTD +5.44%, YTD -8.04%).
Asian Equities
Asian equity markets were mostly lower on rising tensions between the US and China, and disappointing news from US tech giants. DJ Asia Index was higher by +0.40% for the week (MTD +4.15%, YTD -7.07%).
Drivers: I) High frequency economic data out of China shows a slowdown in the normalization of activity. Transportation seen through daily auto traffic for the top 100 cities is back to historical normal levels. The report on air traffic is showing subdued activity for international flights but domestic flights are slowly increasing. Daily sales data is showing a drop in mid-July across autos and apparel, 19.0% and 7.0% respectively.
II) The Composite PMI in Japan for July rose by 3.1 points to 43.9, but is slower than the 13.1 pace seen in June. The lost in the recovery’s momentum was due to the service sector after rebounding strongly in May and June. The manufacturing sector continued to see a subdued recovery, due to sizable inventory levels and weak external demand. The services activity index was up 0.2 points in July, and remained below 50 at 45.2.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +0.24% (MTD +2.07% YTD -2.73%), the Hang Seng Index was lower by -1.51% (MTD +1.12%, YTD -11.96%) and the Shanghai Composite declined by -0.54% (MTD +7.11%, YTD +4.81%).
Fixed Income
Treasury yields declined on the week as the rising global cases of COVID-19 and the increase in tensions between the US and China drove a safe haven bid for treasuries.
Performance: I) The 10-year Treasury yield was lower last week ending at 0.591% down from 0.634%. The 30-year yield fell last week finishing at 1.232% declining from 1.330%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.41% last week, MTD +1.19% and YTD +7.40%. The Bloomberg Barclays US MBS TR was lower by -0.14% last week, MTD -0.08% and YTD +3.42%. The Bloomberg Barclay’s US Corporate HY Index was higher by +1.56% for the week, MTD +3.82% and YTD -0.13%.
Commodities
The DJ Commodity Index was higher last week by +1.97% and is up month to date +5.22 (YTD -8.05%). The commodity index jumped on the week as both silver and gold reached multi-year highs.
Performance: I) The price of oil rose last week by +1.89% to close at $41.34 and is higher month to date by +5.27% (YTD -32.30%). Oil prices jumped on positive PMI data out of Europe, and the rise in storm activity in the US gulf coast which could disrupt oil production and supply.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -1.73% ending at 94.35 for the week (MTD -3.12%, YTD -2.11%). The USD fell last week to its lowest point since March, as the sharp rise in US COVID-19 cases could blunt the country’s economic recovery.
III) Gold rose for a seventh week in a row, as the increase in geo-political tensions between the superpowers China and US, brought the precious metal within a short distance from its all-time high of $1920.0. Gold was higher by +0.56% last week, climbing to $1900.3 (MTD +5.54%, YTD +24.76%).
Hedge Funds
Hedge fund returns in July are higher with all of the core strategies Equity Hedge, Event Driven, Macro/CTA, Relative Value and Multi-Strategy in positive territory.
Performance:
- The HFRX Global Hedge Fund Index is higher at +1.46% MTD and up +0.36% YTD.
- Equity Hedge has advanced by +1.46% MTD and is lower by -4.93% YTD.
- Event Driven is up MTD +1.11% and is up YTD +2.74%.
- Macro/CTA has risen by +1.40% MTD and is higher by +0.67%
- Relative Value Arbitrage is higher by +1.83% and is up +2.95% YTD.
- Multi-Strategy is up MTD by +1.78% and has risen by +2.72% YTD
Data Source: Haver Economics
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